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How much should you contribute to your HSA?

Key takeaways

  • Contributing to your HSA can help you save for medical expenses today and in the future.
  • The tax advantages of an HSA can help your dollars go further (if certain conditions are met).

Just by opening a health savings account, or HSA, you've taken a step toward getting ahead of your health care costs. Then it's time to ask yourself an important question: How much should I save?

Here's how to figure out how much you should contribute to your HSA.

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How much should you contribute to your HSA?

Because HSAs come with several tax benefits that could save you money, you may want to consider contributing as much as you can to your HSA. There are a few different ways to approach this.

Save the difference in plan costs Only those enrolled in HSA-eligible high-deductible health plans (HDHPs) can contribute to HSAs. Like the name implies, HDHPs come with larger deductibles, or the amount you typically pay before insurance coverage kicks in. These higher deductibles generally mean lower premiums (aka the cost you pay each month for insurance coverage) than plans with lower deductibles and lower thresholds before insurance starts footing some of the bill. (Keep in mind that both high- and low-deductible plans usually cover preventative care, like annual physicals, even before you've met your deductible.)

Plan for present-day expenses If you have relatively consistent medical costs from year to year, look over past bills, prescription costs, and other health expenses to determine your typical health care spending. Aim to set aside at least that amount in your HSA each year and enjoy the benefits.

What benefits? HSAs help give you more bang for your medical-expense buck. For example, if you're in the 22% federal income tax bracket you could potentially save almost 30% in taxes (federal income + FICA + potentially state income) on each dollar contributed to the HSA via payroll deduction. That could mean a nearly 30% discount for every dollar contributed and then spent on a qualified medical expense each year. As an added bonus, there's also tax-free investment growth potential and tax-free withdrawals when used to pay for qualified medical expenses.1

Set aside the cost of your deductible or out-of-pocket maximum There are 2 important numbers to be aware of with every medical plan. In addition to the deductible, there's the out-of-pocket maximum, which is the most your insurer expects you to pay for covered medical expenses each year. Costs applied to the deductible count toward your out-of-pocket max as well as any cost-sharing that applies after you hit your deductible.

Both the deductible and out-of-pocket maximum vary by health insurance plan, but as you might expect, they can be a lot for people to cover, especially in a pinch. That's why you may want to use your deductible or out-of-pocket max as a guide for deciding how much you want to save in your HSA. That way, you'll know you could cover a worst-case scenario.

This option may take a little bit of planning, however, depending on your plan, you may not be able to save enough in your HSA over the course of just 1 year to cover your deductible or out-of-pocket max due to annual HSA contribution limits. Luckily, since contributions carry over from year to year, you can make a goal of saving for these expenses over multiple years. In the meantime, you might use your HSA to cover incidental medical costs or pay for them with non-tax-advantaged dollars to help your HSA balance rise faster.

If you decide to save your deductible or out-of-pocket max in your HSA, you'll also want to keep in mind that HSA contributions are typically pulled from your paycheck in small increments throughout the year. In other words, you may not have enough to cover expenses at the beginning or middle of the year, so you'll want to have a plan for any costs that emerge before your HSA is fully funded or see if your plan administrator will let you frontload your contributions.

Contribute the maximum As with all tax-advantaged accounts, there's an annual contribution limit to consider. For 2024, the IRS contribution limits for HSAs are $4,150 for individual coverage and $8,300 for family coverage. If you're 55 or older during the tax year, you may be able to make a catch-up contribution of up to $1,000 per year. Your spouse, if age 55 or older, could also make a catch-up contribution, but will need to open their own HSA.

By contributing the max to your HSA, you position yourself to finance both your and your dependent's current medical expenses with money from a non-tax-advantaged source, like your checking account.

And if you're financially able to, it may be worth considering not using savings in your HSA for current medical expenses and instead stashing that money away for the future. Leaving those savings untapped could help you further take advantage of the tax advantages of the account, and help your investments potentially grow over the long term. HSAs have many different uses and one that shouldn't be overlooked (if your financial situation permits) is to use your HSA as a tax-advantaged retirement savings account.

The ability to save and carry forward the HSA contribution maximum each year is a nice pro because health care in retirement can be expensive. According to the Fidelity Retiree Health Care Cost Estimate, an average retired couple age 65 in 2023 may need approximately $315,000 saved (after tax) to cover health care expenses in retirement. An average individual may need $157,500 saved (after tax) to cover health care expenses in retirement.2

And if you reach retirement age and don't need all of your HSA funds for health care costs, HSAs have another benefit: Starting at age 65, there is no penalty if you use HSA money for non-qualified medical expenses. Depending on your earnings for the year, you may pay income tax on your withdrawals, but you are free to use them however you want. Before you turn 65, though, you'll face a 20% penalty (plus any applicable taxes) on withdrawals not used for qualified medical expenses. You can reimburse yourself at any time for qualified medical expenses you paid for, even years after the expenses occurred. So if you save the maximum, you can always withdraw up the the total amount of qualified medical expenses paid without incurring a penalty.

How to help grow your HSA balance faster

Thanks to their carry-forward nature, you can grow your HSA balance over time just through regular contributions. But many people miss out on a potential way to raise the value of their HSA without necessarily having to contribute more: investing. The Employee Benefit Research Institute reports that just 12% of HSA balances are invested.3

By investing your tax-advantaged HSA dollars and keeping those dollars invested over the long term, you position them to potentially accumulate substantial earnings that you can later use for qualified medical expenses.

As with investing in any account, investing your HSA dollars comes with risk, including the risk of loss. You may consider setting aside at least your deductible or out-of-pocket maximum in cash to make sure you're covered in case of a medical emergency. Once you've set an amount for cash, you can invest the rest. When considering your asset mix, you'll want to ensure it is aligned to your investment time frame, financial situation, and risk tolerance.

If you can't decide how to balance saving versus investing, check out our guide on how much cash you should keep in your HSA.

Consider a health savings account (HSA)

With an HSA, you can pay for qualified medical expenses in a tax-advantaged way.

More to explore

1.

With respect to federal taxation only. Contributions, investment earnings, and distributions may or may not be subject to state taxation.

2.

Estimate based on individuals retiring in 2023, 65-years-old, with life expectancies that align with Society of Actuaries' RP-2014 Healthy Annuitant rates projected with Mortality Improvements Scale MP-2020 as of 2022. Actual assets needed may be more or less depending on actual health status, area of residence, and longevity. Estimate is net of taxes. The Fidelity Retiree Health Care Cost Estimate assumes individuals do not have employer-provided retiree health care coverage, but do qualify for the federal government’s insurance program, original Medicare. The calculation takes into account Medicare Part B base premiums and cost-sharing provisions (such as deductibles and coinsurance) associated with Medicare Part A and Part B (inpatient and outpatient medical insurance). It also considers Medicare Part D (prescription drug coverage) premiums and out-of-pocket costs, as well as certain services excluded by original Medicare. The estimate does not include other health-related expenses, such as over-the-counter medications, most dental services and long-term care.

3. Jake Spiegel and Paul Fronstin, "Health Savings Account Balances, Contributions, Distributions, and Other Vital Statistics, 2021: Evidence From the EBRI HSA Database," The Employee Benefit Research Institute, January 26, 2023.

Investing involves risk, including risk of loss.

Fidelity does not provide legal or tax advice. The information herein is general and educational in nature and should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact investment results. Fidelity cannot guarantee that the information herein is accurate, complete, or timely. Fidelity makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information. Consult an attorney or tax professional regarding your specific situation.

This information is intended to be educational and is not tailored to the investment needs of any specific investor.

The information provided herein is general in nature. It is not intended, nor should it be construed, as legal or tax advice. Because the administration of an HSA is a taxpayer responsibility, you are strongly encouraged to consult your tax advisor before opening an HSA. You are also encouraged to review information available from the Internal Revenue Service (IRS) for taxpayers, which can be found on the IRS website at IRS.gov. You can find IRS Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans, and IRS Publication 502, Medical and Dental Expenses, online, or you can call the IRS to request a copy of each at 800-829-3676.

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